1. What is the dispute about?
The 2022 Inflation Reduction Act offers subsidies and tax credits for the production of electric vehicles, renewable electricity, sustainable aviation fuel and hydrogen. Solar and other green industries are creating thousands of US jobs as the economy recovers from the pandemic, and Biden needs a solid economy if he seeks reelection in 2024. EU policymakers are concerned that the law could lure investment to the US that would otherwise flow to Europe if there were a more level playing field.
Industrial subsidies have been at the core of some of the thorniest disagreements between the US and the EU, including a multi-decade dispute over support for aircraft makers Boeing Co. and Airbus SE that led to tariffs on tens of billions of dollars worth of trade in 2019. These stand-offs can drag on for many years and lead to punitive costs on companies, leading to higher prices and weaker growth. That’s the last thing either side needs right now, with governments keen to foster industries that can help them meet binding climate commitments.
3. Why does the EU object to the US subsidies?
The European Commission, which handles international trade matters on behalf of the EU’s 27 member states, says the US measures include local content, production and assembly requirements that discriminate against non-US companies. Specifically, the law offers consumers a $7,500 tax credit for electric vehicles as long as 40% of raw materials in their batteries are extracted and processed in the US or in countries that have a free-trade agreement with the US. That means US partners — such as Canada and Mexico — are exempt from the law’s content restrictions, while other foreign car producers are not.
4. Has the US addressed the EU’s concerns?
Biden is unapologetic about the law, saying it benefits US workers and helps fight climate change. Nevertheless, he acknowledged that the law has some “glitches” and told reporters in late 2022 that there’s room for tweaks to “make it easier for European countries to participate.” Separately, the US Treasury Department has signaled that some imported cars will qualify for electric-vehicle tax credits, which assuaged some, but not all, EU concerns.
5. How has the EU responded?
Its member states are yet to agree a common stance on the US green subsidy law. The European Commission and EU leaders such as France’s Emmanuel Macron have called on Washington repeatedly to change the rules. The commission filed a direct appeal to the US Treasury Department with its concerns. The head of the European Parliament’s Trade Committee, Bernd Lange, called on the commission to file a complaint at the WTO. If the EU lodges a dispute with the global trade body and wins, it could persuade the US to change its rules or face trade retaliation, but that would take several years to play out.
6. How is this fight related to China?
The dispute risks undermining Biden’s effort to invigorate transatlantic trade and build a coalition of western allies to confront trade abuses by China. The readiness of both the US and the EU to offer financial support to their local industries makes it harder for them to complain about China doling out its own subsidies on a range of critical goods. As recently as 2022, Washington and Brussels were negotiating a deal to set new international rules aimed at curbing trade distorting Chinese subsidies. The new US climate bill represents a change of tactics — aiming to redirect global supply chains for clean-energy products away from China so that Beijing can’t abuse its dominant position in some key raw materials. Any resulting supply-chain disruption could affect the EU disproportionately as it relies on China for 98% of its rare-earth minerals and magnets, which are used in car batteries, solar panels, power generators and hydrogen storage equipment.
7. What does the WTO say?
Nothing formally, as the EU hasn’t filed a dispute. But WTO Director-General Ngozi Okonjo-Iweala urged the US and EU to try to settle the disagreement amicably to prevent a “race to the bottom” on subsidies.
8. Could the EU match Biden’s green subsidies?
Yes. The Biden administration has encouraged the EU to offer green subsidies of its own. In January, European Commission President Ursula von der Leyen announced a “Net-Zero Industry Act” aimed at increasing funding for green technologies in response to the impending US climate law. If the US and EU can successfully align their green subsidy plans, it could even accelerate global decarbonization efforts and become a model for other nations to emulate.
9. Could this trigger another transatlantic trade war?
It’s too early to say. Biden says he’s committed to addressing the EU’s concerns and the Treasury Department’s implementation work is ongoing. German Chancellor Olaf Scholz says he’s convinced there won’t be a trade war and expects the US and EU to reach a deal to resolve Europe’s concerns.
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